Ed Balls branded George Osborne the "downgraded chancellor" on Monday and warned that the Treasury remained in "complete denial" about the failing economy after Moody's stripped Britain of its triple A credit rating on Friday.

The shadow chancellor echoed the late John Smith's famous description of John Major in 1992 as a "devalued prime minister of a devalued government" after Black Wednesday when he mocked Osborne, who he said had failed his own economic test.

The accusation followed a weekend of bad press for Osborne, who had tied his party to protecting the UK's much coveted credit rating. After the downgrade, the pound fell to a two-year low and analysts warned of a grim economic outlook.

Gerard Lyons, a former City economist appointed by London mayor Boris Johnson as his chief economic adviser, added to the pressure on the chancellor to change course by advocating a boost to spending on infrastructure projects and housing to get the economy out of a rut.

Balls said Osborne had lost his credibility after aligning himself to a policy of debt repayments that had failed. Figures from the independent Office for Budget Responsibility (OBR) show the government is likely to borrow at least £200bn more than it planned by the end of the parliament despite its tax rises and spending cuts.

Balls pointed out that the Tory party said, in the first of eight economic "benchmarks for Britain" in its manifesto for the last election: "We will safeguard Britain's credit rating with a credible plan to eliminate the bulk of the structural deficit over a parliament."

This followed Osborne's warning in a speech in August 2009 that: "Britain faces the humiliating possibility of losing its international credit rating." Balls told MPs: "The downgrading of Britain's credit rating is, in the chancellor's own words, a 'humiliation' for this government … The first economic test he set himself has been failed by this downgraded chancellor. Yet, as we have seen today, he remains in complete denial, offering more of the same failing medicine, even though Moody's now agrees that 'sluggish' growth is the main problem."

Osborne was adopting a "baffling and completely illogical" position after Moody's downgraded Britain's credit rating for the first time since modern national debt ratings began in 1978, Balls said. "Over a weekend, he went from saying he must stick to his plan to avoid a downgrade to saying that the downgrade is the reason why he must stick to the plan. He used to say that a downgrade would be a disaster; today he says it does not matter. But he still warns that a downgrade in future might be a problem – until it comes along; then he will have the same excuses. It is utterly baffling and completely illogical. He is just making it up as he goes along."

Lord Oakeshott of Seagrove Bay, the former Liberal Democrat treasury spokesman, said: "This downgrade is a self-inflicted injury for George Osborne. To be fair, he was only an intern shadow chancellor in 2009 and wouldn't know that credit rating agencies like Moody's are riddled with conflicts of interest and are always behind the curve, from sub-prime mortgages to Iceland. He foolishly erected a triple A virility symbol – now he's lost his Viagra."

Pat McFadden, the former Labour business minister, questioned Osborne over his warning in 2009 that to lose Britain's AAA rating would amount to a humiliation. "If the chancellor did not want this to be the test, he should not have set it up to be the test. Does he agree with himself that for the UK to lose its triple A rating would be a humiliation?"

Osborne told MPs that the downgrading was a "stark reminder" of the debt problems built up in Britain. He added that the Treasury had not seen "excessive volatility" in the markets on Monday.

He said: "We can either abandon our efforts to deal with our debt problems, and make a difficult situation very much worse, or we can redouble our efforts to overcome our debts, make sure that this country can earn its way in the world, and provide for our children a very much brighter economic situation than the one we inherited from our predecessors. That is what I will do, and what this government will do."

The chancellor's decision, echoed by No 10, to say that the downgrade highlighted Britain's debt and deficit problems is likely to renew pressure on David Cameron, who said in a recent party political broadcast that the government was "paying down Britain's debts".

The PM's spokesman said: "The point the prime minister was making is that it is this government that does have a plan that, on the most recent set of OBR forecasts, will have debt as a percentage of GDP falling in 2016-17 and it is the government that has reduced the deficit by a quarter."